A surety bond is a contract that is held between at least three different parties. They would include the principal, the obligee and the surety. The principal is the primary person who is going to perform the contractual obligations. The obligee is the person who is the recipient of the obligation and the surety is the person who makes sure that the principal follows through on his or her obligations.
In Europe, surety bonds are issued by banks and they are referred to as “Bank Guarantees” in English and in French speaking countries, “Caution”. These banks pay out cash to the limit of guarantee just in case the principal defaults on his obligations to the obligee.
With a surety bond, the surety makes certain to uphold the contractual obligations that are set forth in the contract. This is for the benefit of the obligee. The contract is created to entice the obligee to work with the principal. This would be to demonstrate that the principal is credible and to guarantee the performance and completion of the agreement.
The principal agrees to pay an annual premium in exchange for the bonding company’s financial clout to ensure surety credit. If there is a claim, the surety is obligated to investigate it. If the claim is found to be valid then the surety will pay the claim and then seek reimbursement from the principal plus any legal fees that may have been incurred.
If the principal defaults AND the surety is not able to pay the claim then the bond is nugatory or is not valid.